Officials looking to plug retirement gaps with state plans

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As more states advance retirement plans with mandates for private-sector businesses, officials behind those plans say the state option is needed to make a retirement-savings option available for the segment of workers least likely to have access to one through an employer.

One of those states is Illinois, which launched the Illinois Secure Choice Savings Program in 2018, gradually phasing in mandates for all businesses with at least 25 employees to offer a qualified retirement plan or enroll in the state option.

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Illinois Treasurer Michael Frerichs chairs the seven-person board that runs that program. He explained at a virtual conference in October that his state's program, which as of earlier this month had more than 72,000 accounts and assets of more than $37 million, is catering to an underserved element of the labor force

"Quite frankly, what we're doing in Illinois is we're catching those that the market doesn't want to serve," Frerichs said at the conference, hosted by Georgetown University's Center for Retirement Initiatives.

"We're serving industries that are more transient, that have higher turnover, that have lower wages, that the financial services industry has just shown no interest in signing up," he said. "So we don't view it as a real competition out there — we are [offering] a safety net for those people who are falling through the cracks."

Illinois, Oregon and California have been early adopters of a state-run auto-enrollment program with a mandate for employers to offer a qualified retirement plan — the state's or a private-sector offering. But four other states have similar programs that are counting down to their launch, and five states are rolling out other programs that are either voluntary or carry a mandate for employers to offer some retirement savings plan, according to Georgetown's Center for Retirement Initiatives, which tracks state retirement programs.

Moreover, since the beginning of the year, at least 20 states and cities have introduced legislation to establish some form of publicly facilitated retirement program, according to the center. The details of those efforts can vary widely, but they all work toward the common goal of addressing the shortfall in retirement savings through a workplace plan, which studies haveidentifiedas the most effective vehicle for encouraging workers to save.

"There is no right answer," said Vermont Treasurer Beth Pearce, whose state's Green Mountain Secure Retirement Plan is set to begin offering open enrollment in a state-facilitated multiple-employer plan early next year.

"It's going to differ by state, it's going to differ by population in those states, the target populations, the ease of administration, a number of factors," Pearce said at the conference. "They're all working forward to get the bottom line, which is making sure that people in this state, people in this country, people all over the world have the right to retirement security."

Those state-run plans have their share of critics, including some private advisers who don't welcome competition from state governments.

Frerichs recalls that argument coming up in the fight in Illinois' general assembly to enact that state's retirement plan. But he and other supporters of the program countered that private plans could use the prospect of a state plan as a "marketing thing," since employers could opt for any qualified retirement plan if they wanted to avoid the state's program.

Read more: How to handle early retirement during the coronavirus pandemic

"Tell employers out there if you don't trust [the] state to run your program, you can sign up for ours," Frerichs said. "And some did, but the vast majority out there did not."

Backers of the various state plans have long contended that the states have no interest in competing with the private sector. But as a matter of practice, the private retirement-plan market has developed in such a way that often there aren't many good options for the smallest employers, state officials say.

"We're not there to replace programs. We want to be additive where programs do not already exist," Pearce said. "Many of those are in terms of scale — when you're talking 50 or less employees or some of them as low as two to nine, there's not a lot of incentive to go out there and provide that safety net."

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